Background

The term online advertising refers to ads that are served via the Internet. Early online ads ran on dial-up services such as Prodigy, eventually coming to the World Wide Web in the mid-‘90s as banner ads or graphical pictures embedded onto sites such as the Global Network Navigator (GNN) and HotWired. Rick Boyce, the director of business development at HotWired (the online arm of Wired magazine) at the time, helped push through the first banner ad campaigns in 1994, including the AT&T banner ad pictured here.

Early banner ad on HotWired

When advertising started to appear on the web, many people were upset that the Internet, which had been developed for military, governmental and educational purposes, would be commercialized. But what HotWired offered to advertisers was a way to track ad performance by “clickthrough rates,” literally counting the times that people clicked on ads. The web has long been hailed as the most trackable medium, especially compared to broadcast TV and radio, because the computer user’s trail of clicks can be tracked closely.

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Over time, banner ads became less useful for advertisers as people tuned them out or sought software to block their delivery. This led to an arms race for people’s attention, as advertisers introduced more and more intrusive ads, from blinking banners to pop-up ads to “interstitials” that take over the screen. Advertisers also have branched out into various delivery methods, sending ads via email, through RSS news feeds, to mobile devices, or embedded into online audio and video, including podcasts.

Pay-Per-Click Ads

As advertisers started to push into more colorful, more multimedia “rich media ads” online, a surprisingly simple text ad started to make a huge impact. The idea started with the GoTo.com search engine, which listed search results depending on how companies bid for keywords. The advertisers only paid GoTo.com each time someone clicked through to their site, a system known as pay-per-click (PPC). Even though earlier attempts at commercializing search results had failed, GoTo.com was more successful because they started life as a commercial search engine. Eventually, the site changed its name to Overture and was bought by Yahoo in 2003 for $1.7 billion.

Google AdWords demo

Meanwhile, Google made a crucial change to the PPC system when it launched its AdWords service in 2000, listing “sponsored links” next to search results. These simple ads consisted of a text headline, a couple short lines and a link, and they eventually proved to be a powerhouse for Google. These ads were successful for three important reasons: 1) They were tied to keywords, which meant that searchers were getting ads that were highly relevant to what they were searching for; 2) advertisers only paid for the times people clicked on the ads; and 3) the popular Google search engine drove huge amounts of traffic to these ads.

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But Google had a problem: GoTo.com had patented these types of paid search placements. Eventually Google settled the patent claim with Yahoo, which owned Overture/GoTo, by issuing 2.7 million shares of stock for a perpetual license. Google later branched out and started serving up PPC ads on third-party sites such as online newspapers and blogs through the AdSense network, delivering ads depending on the content of the page, rather than from search results.

Problems have persisted with PPC ads, as some companies will buy keywords using trademarked terms or the name of rival firms in order to divert traffic to their own websites. So far, courts have sided with Google, allowing people to use trademarked terms in PPC ads as long as they are not posing as the rival company and confusing consumers.

The other problem with PPC ads is click fraud, with hackers or rival firms driving up the cost of ads by clicking repeatedly on ads. Google and other search engines downplay the cost of click fraud, but researchers estimate that 10% to 20% of clicks on PPC ads are fraudulent, costing advertisers from $500 million to $1 billion per year.

Measuring the Phenomenon

Over the past few years, online advertising has become a juggernaut, leading all other ad mediums in growth worldwide. Why? As more people get broadband Internet connections, they tend to spend more of their time online and less time with print publications, TV and radio. As the attention of the public shifts to the Internet, advertisers must follow them in order to keep reaching people.

Here are some recent facts, figures and projections for online advertising in the U.S. and around the globe:

> In Europe, online ad spending nearly doubled in 2006 to 8 billion Euros, according to the IAB. Out of 13 countries covered, the UK brought in the most online ad money, with 39% of the total in Europe.

> In 2006, advertisers spent more money online in the UK (2 billion pounds) than in newspapers (1.9 billion pounds). In the second half of the year, Internet ad spending in Britain made up 12.4% of all ads sold, topping the global average of 5.8%.

> eMarketer found that Google, Yahoo, AOL and MSN took in 57.4% of all U.S. Internet ad money in 2006, a percentage it predicts will rise to 66.6% for 2007.

Despite all these rosy projections, it pays to remember that advertising is a cyclical business, and online advertising dropped like a lead balloon after the dot-com bust in 2000.

Challenges

As marketers fall over each other to reach the growing online audience, a host of challenges remain for them. Because online advertising is a new frontier, marketers often find themselves crossing ethical boundaries for users. Email advertising led to spam, or unsolicited email, which has almost ruined the email experience for many people. Advertisers also started using pop-up or pop-under ads that served an ad in a new browser window, forcing people to close the window and view the ad. That led to people using pop-up blocking software, now a standard feature in the Firefox and Intenet Explorer browsers.

Vibrant Media demo

On the web, the line between editorial and advertising has been fuzzy, both on search engines and on news sites and blogs. A company called Vibrant Media serves up what it calls “in-text advertising” a double-underlined text link from within news stories or editorial content. When you click on the double-underlined word, it brings up an ad related to that phrase. Though that practice is controversial with readers, Vibrant says the number of publishers who use its network has gone up 90%.

Over in the blogosphere, a company called PayPerPost pays bloggers to write positive reviews of products. At first, the company did not require that bloggers explain that they were paid for the mentions, but later they gave in to complaints and required disclaimers. While many bloggers and blog readers were upset with the paid placements, PayPerPost recently received a $7 million round of funding.

Advertisers have had to worry about being associated with these types of ethically challenged ad methods online, along with adware and spyware companies that deliver ads via software that’s loaded onto unsuspecting people’s computers. In one example, ads sold by Yahoo in its search advertising network ended up being served through adware companies unbeknownst to the advertisers. So their ads showed up through adware companies that might have upset viewers — not exactly a good forum for selling or promoting a product.

Advertisers also face the challenge of gauging just how many people have viewed online ads. Tracking ads online is a tricky proposition, despite the Internet’s claim to better trackability. The problem is that it’s difficult to gauge how many unique people are actually viewing an ad, versus the same people viewing the ad multiple times on different computers, or automated Internet spiders or bots that scour the web for search engines.

Innovation

As people stop clicking on banner ads and pay less attention to search-related text ads, marketers have tried out new ways to reach an increasingly saturated-by-advertising audience. Video ads play before you watch online videos on many mainstream news sites, and audio podcasts include ads read by the hosts. Advertisers are also considering ways to send relevant ads to mobile phones, though many people want to get free data or free calls in return for watching ads on cell phones.

To help advertisers target people with relevant ads, firms such as Revenue Science offer “behavioral ads” that are served according to your online browsing history. For instance, if you went onto travel sites looking for good air fares, and then you went to read a story at the Wall Street Journal Online, you would get a banner ad served at WSJ.com touting a travel deal. Though these services have raised privacy issues, even 50% of people who are sensitive about their personal privacy said they would like to get promotions and offers based on their interests and tastes, according to a study by the Ponemon Institute.

As more and more members of the group formerly known as the audience start creating their own media, advertisers have tried to harness that creative energy by asking them to make their own ads for products they love. That strategy worked well for Frito-Lay as it paid a pittance to run a user-generated ad for the last Super Bowl. But the strategy backfired for Chevy, when it asked users to create their own video ads for the Tahoe SUV and people used the platform to criticize the company for promoting gas-guzzling cars.

Terminology

Here are some common terms in the online advertising world:

ad impression: Each time someone views an advertisement online.

ad networks: A company that sells ad inventory in aggregated packages to advertisers. One example of an ad network for blogs is called BlogAds.

banner ad: Graphical advertisement on a web page that allows people to click through to a special advertiser’s site.

behavorial ads: Advertising that’s served up according to a person’s recent online web surfing, matching their interest even if they are not currently on a relevant site.

clickthrough rates (CTR): The percentage of times that a person seeing an ad online clicks on the ad.

cost per action (CPA): A type of ad in which the advertiser only pays the publisher for each time someone completes a transaction, whether that’s registering for a site or buying a product.

cost per thousand (CPM): The rate it costs for the ad to reach a certain number of viewers online. So a site with a $10 CPM would charge $100 for every 10,000 viewers reached.

pay-per-click (PPC): An ad in which the advertiser only pays for each click made by viewers, with the price set by bidding against other advertisers online.

opt-in marketing: Ads or commercial emails sent with the prior approval of recipients.

rich media ads: Display ads online that use animation, flashy graphics, audio or video to pop off the page for viewers.

spam: Commercial email messages sent without the recipient’s approval.

Resources

To read more about the ever-changing world of online advertising, check out these articles, blogs, websites, and research houses:

What do you think about online advertising? What types of online ads annoy you and which ones do you welcome? Are there any other excellent sites or blogs you follow for coverage of the online advertising phenomenon? Share your thoughts in the comments below and we’ll update this blog post with any important resources.

It’s all about conversion. On line marketing and the power of measuring the results make it this way and that is generally a good thing. The problem with SEO is the limited space and the Google algorithm as a moving target.

It’s all about conversion. On line marketing and the power of measuring the results make it this way and that is generally a good thing. The problem with SEO is the limited space and the Google algorithm as a moving target. Search Engine Advertising and behavioral / content linked advertising provides a close 1-on-1 client experience.

There are three reasons here:
– growth of internet as a medium of commerce
– ability to target ads in a much better manner
– ability to report in a much better manner

Best point of purchase advertising as well is a factor.

juhi

thats quite a comphrensive veiw . but lets be realistic about the types of ads that the user views, largely on gaming,and cheap deals. i’m not aware but video ads can be more evolved on the net as they are on t.v

John Karl

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Very useful blog. Ads on videos and ads which are in video format seem to be getting the most attention at the moment. Making people see ads, like on TV, seems to be increasing more on the Internet.

Online Advertising Network

When compared to traditional advertising it becomes obvious the objective of marketing.

Marketing is not what generates a sale or closes the sale. Marketing in any business is to attract a potential customer.

It is the responsibility of the business, be it bricks and mortar or online to close and complete the sale.

So the question is, will advertising decline? Well to answer that question then simply ask yourself, does your business still need a flow of potential customers?

If there is a replacement for advertising, online or offline, then maybe.

Sure businesses have tighter budgets now, but should they increase their potential customer flow or let it dwindle in times of recession?

Simple answer, never let the customer flows dwindle. Cutting costs and expenses is important when revenue drops, but cutting expenses will not cause revenues to increase. Only increasing customer flow or web traffic will.

Cost per click and Cost Per Action Online Advertising is a wiser investment now more than ever as businesses begin to measure the quality of marketing efforts and the ROI.

Online ads for sites.

I think nowadays due to technological changes new forms of ads have come,but still the text link ads seems to be popular.

Swati

Amazing article. I have chosen this for my MBA on-line advertisement project. Gives a lot of gyan regarding how much Ads have eveolved over time! Thanks.

This is by far the most comprehensive review about online advertising. Thanks for sharing your thoughts as well as pointing to different places where we can get additional information.
I think mobile advertising will be the next generation form of advertising which might conquer the whole world

Cristino

Very informative and helpful post about online advertising. I find it very nice and i really admire it.

An article which is only 2.5 years old is insightful about the rate of change of the growth of the internet.
This article does not mention any social media (even in the innovations section) and also misses out on mentioning the lack of cash might be a dampener (as the credit crunch was)!
But the omissions goes to show how the internet is fast changing.

SUPERB!….Just what Ive been looking for a interactive and simple explanation into the world that surrounds my business..I will be directing many first timers here for sure as a start point ******;-)

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